Here's to Co-Opetition

The Economic Times - December 2002

It is with surprise that I read a recent spate of articles in the business press about one of the jewels in our crown - the dairy co-operative sector, of which Amul is the most celebrated offspring of the illustrious parent NDDB. "NDDB: A dream gone sour for Dr Kurien", says one headline.

It contains an interview with Dr Kurien, the founding father of the dairy co-operative sector, criticising the National Dairy Development Board's decision to float a subsidiary marketing company, which would partner with state level dairy co-operative federations in the form of joint ventures.

According to NDDB, this is a move designed to strengthen the marketing capability of the co-operative sector. Dr Kurien agrees that "most federations, unlike Amul, were not professionally managed", but feels that NDDB should not step beyond its role as a funding agency.

I am a bit puzzled. If the marketing arms of the co-operatives are broke, shouldn't they be fixed asap? Especially since the luxury of protectionism in which Amul grew up is now a thing of the past, and the very companies that NDDB has traditionally fought against - Lever, Britannia, Nestle - now had their shackles removed.

If the sector's marketing capabilities are not strengthened, the whole co-operative business model could collapse, destroying supplier power, which is the very religion of the co-operative sector.

The issue bothering Dr Kurien, according to the article, was that the proposed marketing organisation structure was not founded within the co-operative framework, and any move to adopt a corporate model, in the form of joint ventures, would be the beginning of the end.

But the question to ask is, whether dogmas should remain unchanged for 35 years, despite all the forces affecting the business having changed. Co-operatives, the world over, have started restructuring themselves.

The McKinsey Quarterly of 2002, volume 3, has a detailed analysis on how co-operatives in other parts of the world are performing. The message is that the road ahead will be rocky, and co-operatives should strengthen their vehicles to be able to take this journey, rather than be obsessed with the road behind.

The article called "A value culture for Agriculture" says "co-operatives [in the United States] handle $121 billion annually... With a few notable exceptions, they destroy value - nearly $2 billion in 1999 and 2000 - and the destruction continues through both the high and low phases of the agricultural cycle. Co-ops must create value to survive. Successful co-ops focus on a clear need or a discrete customer group, use scale to deliver their products and services efficiently to their target markets, and hold themselves to high performance targets. Performance management and reformed operations promote a virtuous cycle of value creation. Combined with new-generation approaches to equity trading and a new, competitive mind-set, these measures can ensure that co-ops adapt to and thrive in the changed agribusiness industry."

One of the examples of reform the article talks about is the "Fonterra Co-operative Group, created in 2001 through the merger of New Zealand's largest dairy co-ops and the Dairy Board (also ultimately owned by farmers), shows the power of consolidation. In the 1980s, New Zealand had more than 50 co-ops, but by 2000 consolidation had cut their number to 4, bringing improvements in productivity and farmers' earnings. Dairy farmers recognised that further mergers could provide the scale of investment required to compete in global markets. With aggressive moves such as a joint venture (announced in March 2002) with Nestle, Fonterra is expected to have annual sales of some $1.4 billion. It is poised to become a leader in the global dairy industry".

The Fonterra model is not necessarily the model for Indian co-operatives to adopt, but it is a pointer to radical steps that co-operatives are taking in order to survive and create value for their members.

NDDB has crafted its own model, taking the realities of the Indian situation into account. This is obviously not the most perfect solution, but all of us in business know the imprudence of waiting for the most perfect solution to emerge, in the fullness of time - while competition steadily gains ground, and achieves the critical mass it needs to destroy your business! NDDB has to try hard to invent and implement the new co-operative model for the new competitive world.

Not doing so would be defeating the very purpose why it was set up - to fund and guide co-operatives so that farmers can prosper, and not be at the mercy of middle men or powerful buyers, determined to squeeze their margins.

It cannot cling to the old and the known and the familiar. It needs as much professional support as it can get from people and institutions who understand its mission and share its values.

A second editorial in one of the leading papers, titled "Mother Dairy vs Amul".

It commented on the competition between Mother Dairy and Amul, both co-operative sector brands, and asked "why shouldn't two co-operatives compete as they are effectively doing in Delhi"? Indeed, why not? The only thing to guard against is a replay of the old story of two cats fighting over a bar of chocolate, while the monkey on the side actually ate it all, in the confusion. That would, indeed, be a tragic end to it all!

The article then goes on to ask "On the other hand, as this movement has been so successful, why emasculate it?" Exactly. The movement has actually done well on the brands front - Verka, Vijaya, Milma, Avin, Nandini, are all co-operative sector brands which have flourished, and built relationships with customers over the years.

Why not strengthen these "of the people, by the people" brands to take on new competition, following the glorious example set by Amul? A co-operative sector that owns 10 vibrant regional brands will be far better at creating value for its members than one which has just one national brand, bravely fighting a slew of competitors!